Tax Sales

What are Tax Sales?

There are two ways to make money
with tax sales: Tax Lien Sales and Tax Deed Sales. A tax lien sale is the sale
of back taxes owed on a specific property. A tax deed sale is the sale of a
property’s deed due to a failure to pay off back taxes and/or tax liens. What
does that mean for you? It means that you now have the potential to make a
smart investment and receive a significant amount of money.

Why are tax sales such a smart
investment? Just by reading the previous paragraph you know more about tax
sales than the overwhelming majority of people in America. And that advantage
is just the tip of the iceberg.

The true benefit of tax sales can
be measured in the interest rates – 16%, 24%, and 36%. Those numbers are the
respective annual interest rates on tax liens in Arizona, Iowa and Illinois. To
give you some comparison, you would be lucky to receive 2% interest on a high
interest savings account. To give you an idea of how much money that is over
the course of a year – with a $5,000 investment you could be making at least
$700 more per year with a tax lien investment in Arizona, than with a 2%
interest rate at your local bank – the equivalent of several months worth of car
payments.

And while you are thinking about
the interest rates, know that these rates are only the beginning. You can, on
occasion, nearly double your investment in a few short days. How? Well, people
who don’t pay their taxes usually don’t pay their mortgages either. Therefore,
if the mortgage holder was to foreclose on the property, and you have just
bought a tax lien on the property, the mortgage holder would have to redeem the
tax lien. This means that you will receive value of the lien plus what the
interest would have been at full maturity – a staggering amount of money in a
short amount of time, if a mortgage foreclosure happens soon after you have
purchased the tax lien. That means in Iowa you would receive 42% on top of the
cost of the tax lien (21 month redemption period at 2% per month). And that is
just tax liens.

Slightly more expensive, you could
buy a Tax Deed, giving you a property – for as little as 20% of its assessed
value. Of course some states allow a right of redemption, but you will still
receive a return on your investment. In Texas that rate of return is a 25%
penalty placed upon the delinquent property owner. Think about that for a
second – even when you lose, you still win. You may not end up with the
property, but you still end up with a significant return on your investment.

You may be asking yourself, why
would the local government or county sell tax liens and tax deeds? Well, they
want to get paid, and selling tax liens and tax deeds allows that to happen.
What makes this noteworthy is that in almost all circumstances the lien and/or
deed is guaranteed by the local government, ensuring that even in a down economy
you will have made a wise and sound investment.

Now do you
understand why tax sales are so lucrative? The relative obscurity of how to
participate in tax sales, gives you the ability to make smart investments, and
their comparatively high interest rates allow you to make a significant amount
of money. And the risk factor is minimal because in almost all circumstances
the lien and or deed is guaranteed by the local government and/or county. While
all of this is true, there are some pitfalls to watch out for. Therefore in
this article we will explain to you the ins and outs of tax sales – specifically
Tax Liens and Tax Deeds and how to put yourself in the best position to make a
successful investment.

How Do Tax Lien Sales Work?

What are Tax Liens?

When a property
owner fails to pay property taxes for a specific amount of time, a tax lien is
filed against him or her by their local government or county. The local
government or county then sells the lien – at auction – to an authorized third
party, who in turn collects on the lien, which is the taxes owed which is often
a substantial interest. The tax lien purchaser can make a significant amount of
money in as little as a few days. The tax lien purchaser also buys the right to
own the property if the delinquent property owner fails repay the lien amount
plus interest within a specific amount of time.

The Payoff – What
You Can Expect to Accomplish

With tax liens, you can make a significant
amount of money in short amount of time due to the high interest rates on tax
liens (New Jersey offers 18% per year for a two year period, plus an additional
penalty of up to 6%). The exciting part is that if a bank forecloses on the
property within the tax lien repayment period, they will pay you the cost of the
lien plus interest at full maturity. In other words: Mr. Sanders purchases a
Tax Lien Certificate in Illinois worth $10,000, with the full 36% interest rate,
and the bank forecloses on the property the following day. The bank will pay
Mr. Sanders $19,000 – what the lien plus interest would have been at full
maturity or 36% a year times 2½ years. In this situation, Mr. Sanders would
make $9,000 – almost doubling his investment in a single day.

Purchasing a tax lien gives the purchaser the
right to own the property, if the lien is not repaid. In that situation, the
property would have been bought for just the taxes owed. So, if the tax lien
owned by Mr. Sanders has not been repaid after two-and-a-half years, he will now
own the property for just $10,000 – his initial investment.

The risk on tax liens is very low
for four main reasons: (1) state and local governments control the tax lien
process, ensuring stability; (2) property owners risk losing their property if
they do not repay the lien with interest; (3) in most states you receive the
property if the delinquent owner does not repay the lien plus interest; (4) the
value of a tax lien is not affected by the economy (unlike the stock market).
In fact, a poor economy usually means that more people fail to pay their
property taxes, enhancing the amount of tax liens available.

Investing in tax liens is
something that very few people understand. Every year there are thousands of
tax lien sales. And when these sales happen, there are usually hundreds of
liens available, giving you a great chance to find a valuable investment at an
extremely discounted rate.

The Payoff – What You Can
Expect to Accomplish

This is where
the money is made. For example, in Illinois, the interest rate ranges from
18%-36% a year, with a two-and-a-half year redemption period. Additionally, if
the bank or local government were to foreclose on the property, the lien holder
would be eligible to receive full maturity on the lien. So say for example,
Mrs. Jefferson would purchase a Tax Lien Certificate in Arizona worth $10,000
and the bank or local government were to foreclose on the property the following
day, they could be obligated to pay Mrs. Jefferson $11,600 – the cost of the
lien at full maturity.

However, if the
property owner would fail to pay the lien back, and the bank or local government
failed to foreclose on the property, the third party may be able to file a lien
foreclosure, which can lead to a Tax Deed Sale (which you can read about here).
The property owner and all possible lien holders have been informed of the legal
implications of their failure to pay property taxes. The tax deed sale will
usually result in either the property being transferred to the third party
directly, or would give the property owner the right to make the first bid on
the property.

A Tax Deed Sale
is a public sale, usually at auction. More importantly, the now owner of the
property after the lien foreclosure/tax deed sale, owns the property free and
clear. All other liens are usually wiped out – property taxes take precedent,
because the government wants to be paid – and any mortgages no longer use the
property as collateral. What this means is that you would most likely own the
property free and clear; however, it is best to check with local officials to
ensure that the original property owner has no right of redemption.

Preparing for the Auction?

Once you have done your initial
research, it is time for the auction. Some local governments and counties still
follow the traditional method of holding auctions in person, while others have
started holding auctions online. It would be smart to attend pre-auction
seminars that are offered, as well as other tax lien auctions to see how they
run, before you invest, so that you can properly plan your investment strategy.

Some local
governments and counties require a pre-registration for the auction – so be
informed of the auction’s specificities and be sure to be on-time. Do not
forget to bring at least two forms of identification (at least one should be a
government issued identification such as a driver’s license or passport).
Sometimes, liens that are not sold at auction can be purchased on a first-come,
first-serve basis – speak with local officials to find out how and where to do
so.

The Tax Lien Auction

Different municipalities use assorted auction methods to
dispose of tax liens that more than one person is interested in. There are
essentially five chief ways a
lien is bid on:

(1) Bidding down the interest.
Under this method, the stated rate of return offered by the government is the maximum rate of return allowed. However, investors can accept lower rates of
return. The investor accepting the lowest rate of return is the winner. In the
event more than one investor will accept the same lower rate, a random or
rotational method (see below) will be used to break ties.

(2) Bidding a Premium on the
Lien. The investor willing to pay the highest premium (the lien amount plus
a premium) on the lien will be the winner. The premium may or may not earn
interest, and may or may not be paid back to the investor upon redemption of the
lien, it is best to speak with a local real estate attorney regarding this
matter.

(3) Random Selection. With
this process a bidder will be randomly selected from those offering bids –
usually through a computer.

(4) Rotational Selection
(used to break a possible tie in bidding down the interest). The first lien
offered for sale will be offered to the investor holding bidder number one, who
has the right of first refusal. If bidder number one refuses the lien, bidder
number two may then bid, and so on. With this type of auction, investors have
little control over what liens they will obtain.

(5) Bidding Down the Ownership
of the Lien. Under this method the winning bid is awarded to the bidder
willing to purchase the lien for the lowest percent of encumbrance on the
property. For example, a bidder may agree to take a lien on only 85% of the
property. If the lien is not redeemed, the investor would only receive 85%
ownership of the property with the remaining 15% going to the original owner.

This is why it would be best to
avoid bidding wars. You could theoretically end up with a lien that can become more of
a nuisance than an investment. An investment that only promises a small rate of
return may not be worth the hassle.

Of course, all of this information is
worthless if you don't first doing your research and then come on time for the auction.

Strategies for Tax Lien
Investment

Research the list of delinquent
properties. Most states and local governments offer listings of tax liens and
tax sales that can by checking the GovernmentAuctions.org website often. Check
GovernmentAuctions.org often for upcoming tax lien and tax deed sales in your
area, because most local governments and counties hold tax sales only once or
twice a year.

When you get a list of properties
from GovernmentAuctions.org, you should begin researching these lists to find
good properties – ones without environmental issues, or other problems. Once
you have found a property you are interested in, you should assess the property
value. How much is the property worth? Even though you will probably avoid
having to foreclose on the property, knowledge of the property is important if
you do end up with the property.

Once you have registered the
winning bid, you must pay within 72 hours. Failure to pay for the lien
certificate will result in a cancellation of the certificate, a loss of your
deposit and a possible exclusion from any future tax sales.

The purchaser also needs to be
aware of any additional steps or requirements that need to be taken following
the purchase a lien certificate. For example, some states, like Arizona require
that the lien certificate holder pay property taxes until the lien has either
been paid off or redeemed (the property taxes paid by the holder, are added to
the lien amount). Failure to pay property taxes can result in either a
cancellation of the tax lien certificate or the loss of tax lien priority at the
next tax sale when a new tax lien is put up for auction – taking away your
ability to receive the property if the delinquent owner fails to pay the lien.
Most importantly, do not forget to record your lien with the local property
clerk’s office (If you are unsure how to do so, speak with a local real estate
attorney who could point you in the right direction), otherwise you may lose
your lien on the property.

A Tax Lien certificate holder must
also be aware that they cannot sell their lien certificate at any time. While
interest in the lien can be assigned, it is best to speak with an attorney prior
to doing so.

The complexity of tax liens
requires you to do research on the laws of various states. Do not be afraid to
speak with a local attorney to better understand these laws, and obligations. It
is this knowledge that will ensure that you are put in the best position to
succeed.

Final Thoughts on Tax
Lien Investing

This whole process
requires you to be smart, and use common sense. Avoid pitfalls – know the
problems and how to overcome them. Don’t just go into an auction and bid on the
first property that comes your way. Do your research, and know which properties
are the ones that you want. Sometimes the best investment you can make is to
hold onto your money and wait for the next property. It is a good idea to speak
with a local Real Estate Attorney prior to auction, to ensure that you
understand all of your obligations, as well as the local rules and regulations
governing the property. Be smart with your money, know your risks, know your
intent and use common sense. Following these steps will ensure that your tax
lien investing experience will be a rewarding experience.

How Do Tax Deed Sales Work?

What are Tax Deed Sales

A tax deed sale is where a local
government or county has foreclosed on a delinquent property owner and has
received title to their property. The local government or county then sells the
tax deed at auction – allowing the winning bidder to obtain property ownership
at a discounted price (sometimes for as low as 20% of its assessed value).

Some local governments and
counties allow a delinquent property owner a right of redemption – a chance to
reacquire their property. Even in this situation, you would come out ahead.
You will receive the amount of money you bid at auction plus interest. For
example, Texas requires a flat 25% penalty to be added to the amount paid at the
sale. If Mr. Sanders were to purchase a tax deed in Texas for $10,000, and the
delinquent owner redeemed the property two weeks later, Mr. Sanders would have
made $2,500, in just two weeks.

Additionally, in most situations
you can use the property during the redemption period. For his $10,000
investment, Mr. Sanders can rent out the property for $1,000 a month, and
receive a full return on his investment in less than a year.

Being an obscure way of investing,
tax deed purchasers benefit from the relative anonymity of tax deeds. For as
many people understand tax lien sales, fewer understand tax deed sales.
Therefore, knowing the ins and outs of tax deed sales, grants you the potential
to make a significant amount of money.

Preparing for the Auction

It is very important to know how
tax deed auctions run. Go to a few auctions and see how they run before you
invest. Some auctioneers run pre-bidding seminars, free-of-charge, allowing you
to ask questions, and find out the specifics of the bidding process. If you
can, attend these seminars – you will have a better understanding of the auction
process.

Awareness of who
shows up the auctions is also important. Are they investors like you, or are
they banks looking to ensure that they receive a full return on their
investment. Knowing these issues can help you identify the costs associated
with obtaining a tax deed helping you go a long way towards evaluating and
planning your investment strategy.

The Tax Deed Auction

Unlike a tax lien sale, a tax deed
sale is a straight-forward auction. The person with the highest bid wins. The
bidding starts at the amount back taxes owed plus interest, as well as costs
associated with selling the property. For example, Mr. Davis owes $1,000 in
back taxes plus interest, and it costs the local government $500 to sell the
property. The bidding would start at $1,500, and depending on the jurisdiction,
the property would be bid up between $10 and $100 at a time.

Also be aware that
you must pay for the tax deed within 72 hours. Therefore, be sure to have the
necessary capital, or financing lined up prior to the auction. Some local
governments, such as New York City, will sometimes offer mortgages, to assist
with payment (but only to qualified buyers), therefore you should speak with the
local government, as well as possible lenders, prior to auction to ensure that
you will be able to purchase the property.

Tax Deed Property Investment –
Knowing the Property

By law, tax deed sales must be
announced to the public – allowing potential investors to do the necessary
research. Therefore, it would be a good idea to check GovernmentAuctions.org
often for upcoming tax deed sales in your area, because most local governments
and counties hold tax sales only once or twice a year.

When you get a list of properties, you should begin researching these lists to find
the types of properties you want to invest in. Do you want to invest in open
lots, commercial space, or residential space? Once you know what type of
property, you can then look to the specific locations of the property.

You may not want to buy a
residential property in the middle of an industrial park, so it is best to know
where the property is located. If you want to invest in a certain area, make
sure that the property you plan on bidding for is worthwhile. If, for example,
the property is landlocked or contains an environmental concern it may be best
to avoid purchasing it.

Some local governments and
counties offer open houses prior to tax deed sales. Much like a test drive, it
would be a good idea to attend the open house, because properties are offered
as-is. If there are any problems with the property, it would be your
responsibility to deal with. Therefore it would be wise to bring along a
contractor and/or an inspector to help assess any problems with the property,
and help estimate a cost to help fix up the property.

Before you attend the open house
you should check with the local code enforcement office to find out what, if any
code violations exist at the property, to make sure that the property is even
worth considering. Finally, you may want bring along an appraiser to
ensure that any bid you place on the property will be a smart one.

Properties go into
tax deed foreclosure for a reason. Find out why. Knowing the geographical
location can only tell you so much when assessing the fair market value. Check
with the local zoning officer to find out the property’s permitted uses. And if
possible, speak to the neighbors – they will be more familiar with the property
and may know much more than any public official.

Possible Problems

If you find
that there are problems speak to a real estate attorney to help you navigate the
legal issues. They know the local laws and can help you if any problems arise
with the property. They can also help you dispose of any personal property left
behind, such as clothing, furniture, and other personal items. A lawyer can
also assist with eviction proceedings, if necessary and most importantly help
you record the deed with the county clerk’s office, enabling you to start using
the property as soon as possible. An attorney can also assist you in obtaining
a free and clear deed on the property.

.

Final Thoughts on Tax Sale
Investing

Doing your research on the properties is just the beginning. As with any
investment, careful planning will ensure that your risk is kept to a minimum.
Remember to be prepared – do your research, know how much you are willing to
spend, and most importantly use common sense. This article is just a guide
towards beginning your investment process. If you follow the above advice
and tread carefully then you
can find tax deed investing to financially be a wildly rewarding experience.